We spoke to Shreyash Devalkar (Sr Fund Manager – Axis Mutual Fund) and Dinesh Balachandran (VP & Sr. Fund Manager SBI Mutual Fund), both experts in the industry to figure out how liquidity and interest rates impact the markets as macro factors in the earnings growth. Some time back we had also released another post on how Earnings Growth took the market past 60k.
Mimi Partha Sarathy:Shreyash Devalkar, are current earnings growth in line with the market expectation?
Shreyash Devalkar: When it comes to earnings growth there are multiple elements. One is export companies led and one is domestic business led.
If you look at the last one year the import of goods by the US has been the highest. So, all export-oriented companies especially IT have seen phenomenal growth. Looking ahead, valuations obviously are high, there is no doubt on that.
Whenever there is increase in interest rate the valuations correct. Equity Is the longest duration Bond.
Mimi Partha Sarathy:Dinesh Balachandran, What Do You Think Is The Impact Of Interest Rate And Sectoral Shift?
Dinesh Balachandran: What happened over the last two years was essentially a collision of multiple phenomenon. Due to covid the central bank and governments introduced even more easy monetary, and physical policies. And we all know that the liquidity wave has helped equities.
When you think about the economic evolution the economy evolves in a fashion where different sectors essentially come to the forefront at different points in time. If you think about the last 10 years, anything related to CAPEX, anything related to the so-called old economy cyclical sectors, were all left in the dump because they hadn't shown any earnings growth. Capacity utilization was quite low, thanks to the excesses of the previous decade. If you look at what has worked in the equity market, it's been the so-called secular themes or end individual linked companies. Mainly consumption linked, even in the financial Space, and especially retail.
But in my opinion now the leadership torch is slowly getting passed on. There are these cyclical sectors where the capacity utilization is going up. Maybe we are not completely there yet and it may take another 12 to 24 months depending on the sector. You will find that the earnings growth will be more phenomenal in such companies.
'People chase earnings growth.'
If you look over the last 18 months, at real estate space, associated ancillary companies, or materials companies we are seeing that the capacity utilization is going up and they are able to seize pricing power back. Some of these companies are now outperforming.
This is something that we witnessed two decades ago. The 90s was a period where the economy was in a stagnation mode so only consumption and Technology did well. The NPA situation was bad even then, compared to what it has been over the last several years. But as the tide turns you will see a new set of companies emerge.
Particularly in the manufacturing space, which are showing high earnings growth. So, it's not all about the liquidity that was available over the last 18 months. And as interest rates go up some of that will completely go away.
This second aspect of the economy evolving in a different fashion I think is coming to fruit and from that perspective I think the leaders of the next decade can be quite different from the leaders of previous decade.
Our take is that this massive earnings cycle has triggered the strong uptrend in markets. It is one of the most important reasons for the current bull market’s correction.
We also need to be mindful that now pricing power has shifted to commodity companies and they are posting healthy earnings while 'consumption' based companies are posting contraction in margins. There is rotation of pricing power happening right now in economy.
We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.
We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.
We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.
We can help you understand how to maximise your investment goals or leave a comment below on your thoughts.
